Darktrace (LON: DARK) (OTCPK: DRKTF) shares are up 1% or so in London off the back of the trading update. This is for Q3 2023 (their fiscal year is not the calendar year, obviously) and sales and revenues are up. Except, in this third quarter, they're not. “During Q3 FY 2023, the Group added net constant currency ARR of $27.0 million, a decline of (6.3)% compared to the same quarter of FY 2022, and for the nine-months year-to-date, net ARR added was $98.7 million, an increase of 3.2% above the comparable prior year period.“That is, there's a very definite slowing in growth going on.
We said this was going to be so at Darktrace when we looked at sector comparators NCC and Shearwater. Both those stocks fell some 40% when they announced their trading. The complaint from all three is really just that it's getting very hard to get the cash out of people. Yes, cybersecurity is important, everyone knows that. Discussions happen. But managements are willing to delay on the grounds of significant uncertainty in the general business environment. Another way to put this is that managements just aren't prioritising spend on security.
Darktrace share price from London Stock Exchange
Of course, the other issue for Darktrace shares is as we've explained elsewhere. There's still market concern about how aggressive they're being at revenue recognition. Now, whether this concern should exist or not is another matter. But it is out there. There are still court cases going on about Mike Lynch's earlier adventure, Autonomy. There have been claims that this hard charging method of revenue recognition was also extant at Darktrace. The company says that was all sorted out before the flotation - even if it ever happened which is didn't.
But the net effect of this is that DARK trades at a lower multiple of revenues and earnings than might be expected. If those doubts are ever fully assuaged then we would see a significant revaluation. But that is still an “if” that hangs over the share price.